If your bank pays 5% interest, that means every three months (quarterly), the bank pays you $5 (5 percent of your original $100) in simpleinterest. After a year, you'll have $120 ($100 — your principal — plus $5 for each quarter in the year).

At the end of the first quarter (three months), the bank pays you $5 (5 percent of $100). Your new principal balance is $105. At the end of the second quarter, the bank pays you 5% interest again. This time, though, it pays interest on your principal balance of $105.

Since 5 percent of $105 equals $5.25, the bank adds $5.25 to your account. Your principal balance goes up to $110.25 ($105 plus $5.25 in compoundinterest). If you do the same math for the third and fourth quarters, you'll find that your principal balance at the end of a year is $121.55.

Some people wonder where banks get the money to pay interest. After all, if the bank keeps your money safe, shouldn't you pay it for such a service? The reason banks can pay you interest is because they use your money — and everyone else's money — to invest in things like stocks, bonds, and mutual funds. The bank makes money (profit) on those investments. It then pays you compoundinterest out of those profits.

Did you get it?

Wonder What's Next?

Try It Out

If you want to pursue your INTEREST in today's Wonder of the Day even further, grab a friend or family member and check out one or more of the following activities:

Why save money? Talk with your friends and family members about why it's important to set aside money rather than spending it all as soon as you receive it. What are some good reasons for saving money for the future? Can you think of things you might want to purchase in the future that you might want to start saving for now? Make a list of future purchases or investments, such as a car or college, and then estimate how much those things will cost. Figure out how much time you have to save and how much you should try to set aside to reach those future financial goals.

Today's Wonder of the Day showed you the difference between simple and compound interest over the course of a single year. Continue those calculations to see what the difference would be over the course of 5 and 10 years. Do you see how compound interest makes your money grow faster over time? What are you waiting for? Get started on a savings plan today!

Ready to put your money to work? First, check with your parents to find out if the bank they use offers accounts that pay compound interest. Next, look at how much money you earn each week from your allowance or chores. Decide how much of your money you want to set aside each week to deposit into a savings account. You'll need an adult to help you open a savings account. Make sure the account pays compound interest (not simple interest), and ask how frequently the interest will be compounded. If you add a little bit of money to your account every week, you'll increase the principal. In turn, this will increase the amount of compound interest you'll earn. Would you like to see how much compound interest you can earn over 5, 10 or even 20 years or more? Try out this compound interest calculator or this one.

Wonderopolis

Aurora

Jan 23, 2012

I was wondering, what are some suggestions for becoming a millionaire? A realistic way to start saving and earning until you get to be a millioniare plus some saving and earning tips would be really helpful!! Thanks for all the helpful information on this site. Also, you guys should do a wonder of the day on ways to start your own business, even if its just a lemonade stand. Thanks, Wonderopolis!

Wonderopolis

Jan 23, 2012

Hi, Aurora! Thanks so much for leaving us a comment today! Although we don't have a Wonder of the Day® about becoming a millionaire (yet), here are some past Wonders that might help you in your quest to earn and save more money:
Wonder #436 - How Can You Use a Budget? http://wonderopolis.org/wonder/how-can-you-use-a-budget/
Wonder #194 - Why Do You Have To Pay Taxes? http://wonderopolis.org/wonder/why-do-you-have-to-pay-taxes/
Wonder #115 - Are Debit Cards and Credit Cards the Same? http://wonderopolis.org/wonder/are-debit-cards-and-credit-cards-the-same/
If you want to learn even MORE about financial literacy, check out this cool activity about saving while shopping: http://www.famlit.org/free-resources/activities/learnandshop/. :-)

noah kinney

Wonderopolis

Oct 20, 2011

Yes, we have heard about that, Noah. It's sad. Sometimes, when we're feeling sad about something like this that we hear about in the news, it's best to talk to a grown-up (like a parent or teacher) about it. They can help us work through our feelings or even just sit and listen to us about how we feel.
We hope you have an AWESOME day and we're really glad you're a friend of Wonderopolis! :-)

Wonderopolis

Mrs. Jarvis's Second Grade

Oct 20, 2011

We think this is a great idea. We can save money by putting it in our own accounts, but first we think we need to earn money. To earn money we have to earn allowance by sweeping the floors, making our beds, washing the dishes, cleaning after our pets and ourselves, and doing our HOMEWORK! We really liked the video. It helped us understand and think of saving our money. :)

Wonderopolis

Oct 20, 2011

Those are GREAT ways to earn money, Mrs. Jarvis’s Second Grade! Plus, they are also awesome ways to help around the house (even if we didn't do them to earn allowance)! We're glad today's Wonder got you thinking about money and ways to earn and save it! We're also glad you like the video! :-)

Wonderopolis

Sharon

Oct 20, 2011

Are you sure it's possible to earn interest quarterly? I don't know of many banks, if any, that will pay 5% or even 1% every 3 months. Most offer an annual interest--which is simple or compound. Your calculations will make students anticipate that they can actually make $20.00 to keep their $100. in a bank for a year. They will be sadly disappointed. Your online calculator creates a more accurate picture--approximately $5.00 will be their reward for their efforts to save.

Wonderopolis

Apr 13, 2015

We're always happy to help, syliva payne! We're glad you and your daughter are WONDERing with us! We had to remove part of your comment for privacy reasons. We hope you understand and continue WONDERing with us! There are over 1,400 WONDERS to explore and a new WONDER of the Day every day! Be sure to check them out! :)

Wonderopolis

Oct 20, 2011

Hi, Sharon! Thank you for your comment today! There are many banks that offer quarterly interest on savings accounts. We really appreciate your concern for how the young visitors to this Wonder will view compound interest and for pointing out that you feel the online calculator provides a more accurate picture of what savers can expect for their efforts! :-)